Hanging on a Hit; Company's Stent Is a Superstar, but What About an Encore?

By BARNABY J. FEDER

Published: August 9, 2005

Few companies have ever enjoyed a product success like Boston Scientific did when it introduced its Taxus stent to the American market 16 months ago.

Taxus blew by records for a new health care product -- even such high-profile drugs as Viagra -- topping $2 billion in domestic sales in its first year. And the stent, a tiny drug-coated metal sleeve inserted into arteries near the heart to keep them open after doctors remove blockages, is unusually lucrative for a medical device, generating profit margins of more than 90 percent.

But Taxus has proved to be a decidedly mixed blessing for Boston Scientific. It has transformed the company from one known for a broad but obscure array of medical devices into a cash-rich powerhouse -- but one dependent on a single high-profile product for more than half its earnings.

Also, in recent months courtroom battles over Boston Scientific's patents and technology -- most notably with its giant rival in stents, Johnson & Johnson -- have raised questions about the company's ability to enhance its current Taxus line.

Those disputes also muddy financial forecasts for Boston Scientific, which could end up spending billions of dollars in royalties and penalties, depending on the outcomes of the legal cases.

Boston Scientific's share price peaked at $45.81 on April 5, 2004, a month after Taxus burst from the starting gate. Investors bet -- correctly, it turned out -- that Taxus would have trouble expanding its share of the stent market beyond the 70 percent it soon seized from the market pioneer, Cypher by Johnson & Johnson. The closing price yesterday was $28.85 a share, about 37 percent below last year's peak.

In a kind of Catch-22, the depressed price is, in turn, making it harder for Boston Scientific to make any bold move to change Wall Street's thinking about the company's near-term growth prospects. Peter B. Nicholas, the company's chairman and largest shareholder, frankly acknowledged that he had been counting on a Taxus-fueled surge in the share price to help pay for acquisitions as large as $20 billion.

''My strategy was to hunker down, focus on Taxus and then use the stock as currency,'' Mr. Nicholas, 64, said during a recent interview at the company's headquarters in Natick, Mass.

Now it is clear there will be no megadeal shortcuts to achieving the financial power and name recognition of Medtronic, the leading medical device company, which generated $10.05 billion in revenue in the fiscal year ended April 30. And Mr. Nicholas' vision of Boston joining the ranks of the world's largest, most diversified health care giants like Johnson & Johnson looks hazier still.

Taxus lifted Boston's revenue to $6.31 billion for its most recent four quarters. The cash has allowed Boston to buy back stock -- $1.1 billion worth since last fall -- and is stirring speculation the company would soon begin paying a stock dividend.

But Mr. Nicholas lacks the financial heft to acquire St. Jude Medical, one of three major players with Medtronic and Guidant in the fast-growing billion-dollar market for implants that regulate heart rhythms, or to buy a major orthopedics company like those owned by Medtronic and Johnson & Johnson.

Instead, Boston is striking smaller deals at a rapid pace. In the second quarter of this year, for example, it spent $203 million on three such acquisitions related to its current businesses.

These were TriVascular, a start-up in Santa Rosa, Calif., that is developing a fabric-covered stent for reinforcing potentially deadly weak spots in the wall of the main artery carrying blood to the lower part of the body; CryoVascular Systems, based in Los Gatos, Calif., which makes a device that cools the inner walls of leg arteries after blockages have been cleared, a stentless way to prevent new blockages from forming; and Rubicon Medical of Salt Lake City, which is developing a tiny filter to trap tissue released into the blood stream during operations.

Boston Scientific spent over $1 billion on 16 such deals last year and expects to match that figure in 2005. Placing many small bets limits the chances for a high-profile fiasco. But it puts intense pressure on James R. Tobin, Boston Scientific's chief executive, and his second in command, Paul LaViolette, to wring more growth from Taxus and accelerate the development of the increasingly diverse product portfolio.

Boston's second-quarter earnings last month only added to the questions about the momentum of the Taxus juggernaut. While sales of Boston's other products expanded and sales of Taxus overseas grew enough to lift overall revenue 11 percent from a year ago, Taxus's $467 million in domestic sales was a 6 percent decline from the first quarter. Moreover, the device's domestic market share fell below 60 percent.

The immediate danger for Taxus is the erosion of its lead over Cypher, a growing threat because of accumulating clinical data suggesting that Cypher may have some health advantages over Taxus. And starting this year in Europe and as early as 2007 in the United States, Taxus could lose 10 percent or more of the market to Medtronic's Endeavor stent, which gained European regulatory approval last month.